Walker v. Barclays Bank (Canada), [1941] SCR 491

Supreme Court of Canada

Walker v. Barclays Bank (Canada), [1941] S.C.R. 491

Date: 1941-06-24

Frank E. Walker and Others (Plaintiffs) Appellants;

and

Barclays Bank (Canada) (Defendant) Respondent;

and

The South Shore Lumber & Builders Supplies Limited.

(Mis-En-Cause)

Frank E. Walker and Others (Defendants) Appellants;

and

Barclays (Canada) Limited (Plaintiff) Respondent;

and

The South Shore Lumber & Builders Supplies Limited.

(Mis-En-Cause)

1941: May 9; 1941: June 24.

Present: Rinfret, Crocket, Davis, Hudson and Taschereau JJ.

ON APPEAL FROM THE COURT OF KING'S BENCH, APPEAL SIDE, PROVINCE OF QUEBEC

Novation—Company—Shares given to a bank as collateral security for debt—Sale of assets and business of company as going concern—Consideration being payment by purchaser of all debts and liabilities of vendor—Purchaser also to create and issue bonds to be delivered to vendor and then to be delivered by the latter to the creditors of the company—Agreement between the parties—Whether intentions of parties were to operate novation—Whether full and complete discharge or only qualified discharge—Rights of the bank upon collateral securities—Articles 1171, 1173, 1174 C.C.

One J. R. Walker, in order to accommodate Walker Press Limited, provided, as collateral security for certain indebtedness of the latter to the respondent bank, a certificate in his name for 150 shares of the South Shore Lumber Company and $10,000 of bonds of the Back

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River Power Company. On October 31st, 1932, an agreement was entered into between Walker Press Limited, as vendors, E. S. Alger as purchaser, and Walker Paper Company, Kruger Paper Company, The Royal Bank of Canada and Barclays Bank (Canada), as intervenants, by the terms of which Walker Press Limited sold its assets and business as a going concern to E. S. Alger, in consideration of the payment and satisfaction of all the obligations of the latter in respect of the lease of the premises occupied by it and in respect of the debts and liabilities of the vendor mentioned in a certain list attached thereto. Alger further undertook to cause a new company to be incorporated and to transfer to that company all the assets conveyed to him, subject to the above mentioned liabilities, and to invest $2,000 in cash in the new company; he was also to cause the new company to create and issue bonds of the par value of $19,000, secured on all the assets acquired from Walker Press Limited as well as upon all future assets of the new company, these bonds to be delivered to Walker Press Limited within 30 days from the date of the agreement. Walker Press Limited undertook to surrender its charter within a reasonable time after the receipt of the bonds and deliver them to the intervenants pro rata and in proportion to their respective claims, Alger acknowledging that he was already in possession of all the assets of Walker Press Limited. Then the agreement contained the following clause: The intervenants (above mentioned) agreed with the Walker Press Limited, vendors and Alger, purchaser, "that when the said bonds of the new company, hereinabove mentioned, shall have been issued and delivered to the Walker Press Company or its representative or representatives that they individually will accept a pro rata amount of the said bonds proportionate to their respective claims against the Walker Press in full settlement and satisfaction of any and all claims they may have against the Walker Press and the purchaser directly or indirectly, save that inasmuch as the Royal Bank of Canada and Barclay's Bank (Canada) and the Kruger Paper Co. Limited hold certain securities as collateral security against the amounts due them by the Walker Press, it is understood that the said banks and the Kruger Paper Co. Ltd., shall be entitled to continue to hold and/or realize upon such security until and unless their said claims are paid in full through the payment of the said bonds or otherwise, it being understood that the present agreement shall not in any way interfere with the rights of the said banks and Kruger Paper Co. Ltd. in respect of said collateral security."

Pursuant to the agreement, Alger caused the new company to be incorporated, and the bonds were created and delivered to Walker Press Ltd.; but, before they were issued, S. R. Alger, a brother of the purchaser, submitted to the respondent bank an option to purchase the bonds to which they were entitled as a result of the agreement, for the sum of $2,81154. The option was accepted and carried out. The bank received the sum of $2,811.24 and surrendered to S. R. Alger its rights to the bond of $14,056.20, which it would otherwise have received. Subsequently, by their action, the executors of James R. Walker claimed that the debt for which the collateral security had been given was extinguished and that they were entitled to recover from the respondent bank the 150 shares of the South Shore Lumber & Builders Supplies Ltd and the $10,000 bonds of the Back River Power Company. At the same time, Barclays (Canada)

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Limited, an assignee of the bank, brought an action to compel the completion of the transfer of the South Shore Company's share certificate in its name. The Superior Court, applying articles 1171, 1173 and 1174 C.C., held "that the agreement of 1932 (did) not create novation; that the Walker Press was discharged only with the reserve that the Bank would hold or realize upon the collateral security until the claim of the Bank was paid in full * * *, it being understood that the agreement would in no way interfere with the rights of the bank in respect of the said collateral security—a stipulation which amounts to say that the bank renounces to any personal recourse against the Walker Press Limited, but the debt is not extinguished, since the bank has the right to sell the collateral in payment of the debt." The judgment of the Superior Court was affirmed by the appellate court, which decided that the respondent bank was entitled to hold the collateral securities: the action of the appellants was therefore dismissed and, consequently, the action of. Barclays (Canada), respondent in the second appeal, to have the transfer completed in its favour, was maintained.

Held that the judgment appealed from should be affirmed. The intention of the parties to the agreement above mentioned was not to effect novation: as stated in article 1171 C.C., novation is never presumed and the intention to effect it must be evident. By force of article 1173 C.C., even if the agreement should be interpreted as one by which Walker Press Limited gave to the respondent bank a new debtor who obligated himself towards the bank, such delegation did not effect novation "unless it is evident that the creditor intends to discharge the debtor who makes the delegation." The alleged full and complete discharge to the Walker Press Limited was, in reality, only a qualified discharge. Undoubtedly the intervenants were giving up any right to claim against Walker Press Limited personally and any right to be paid out of the general assets of Walker Press Limited, except in so far as the bonds which they were getting from Alger Printing Company (the new company) were to be secured upon those assets through the trust deed executed in connection with the issue of the bonds. But their rights upon the collateral securities remained untrammelled and, to the extent that the existence of the debt of Walker Press Limited was necessary for the purpose of preserving to the collateral security the character of a legal pledge, that debt was to remain in existence. It could no longer be claimed as a personal debt against the Walker Press Limited, it could not have been realized against the latter's general assets, but it subsisted as a debt which could be realized against the collateral securities. It became a claim propter rem.

APPEALS from the judgment of the Court of King's Bench, appeal side, province of Quebec, affirming two judgments of the Superior Court, Philippe Demers J., rendered in two actions which were joined at the trial, the trial judge dismissing an action taken by the appellants as executors of the estate of the late J. R. Walker against the respondent bank for the return to them of shares and bonds which had been pledged with the respondent by a company known as the Walker Press Limited as general

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security for that company's indebtedness to the respondent as its banker, and the trial judge maintaining an action by the respondent, in the second appeal, so that the latter be declared to be the only owner of the shares and ordering the transfer of these shares in the books of that company.

The material facts of the case and the questions at issue are stated in the above head-note and in the judgment now reported.

Aimé Geoffrion K.C. and H. N. Chauvin K.C. for the appellants.

Ls. St-Laurent K.C. and W. C. Nicholson K.C. for the respondents.

The judgment of the Court was delivered by

Rinfret J.—These are two appeals by the testamentary executors of the late James Robert Walker from judgments rendered against them by the Superior Court of the province of Quebec, sitting in Montreal and the Court of King's Bench (appeal side) of that province.

The decision in each of them depends on the solution to be given to identical questions of law, and, in point of fact, on the construction of the same document. They were submitted to this Court on the same argument and may be conveniently disposed of on the same set of reasons.

The late James Robert Walker, in order to accommodate Walker Press Limited, provided, as collateral security for certain indebtedness of the latter to the respondent bank, the following:

(a) a certificate in the name of J. R. Walker for 150 shares of the common stock of the South Shore Lumber Company (now the South Shore Lumber & Builders Supplies Limited);

(b) $10,000 of the 6% bearer bonds due 1st January, 1941, of the Back River Power Company.

On October 31st, 1932, an agreement was entered into between Walker Press Limited, as vendors, E. S. Alger of Oshawa, Ont., as purchaser, and Walker Paper Company, Kruger Paper Company Limited, The Royal Bank of Canada, and Barclays Bank (Canada), as intervenants, by the terms of which Walker Press Limited sold its assets

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and business as a going concern to E. S. Alger, in consideration, amongst others, of the said Alger providing for the payment of the debts of Walker Press, as will later be more fully explained.

In the first action, the appellants prayed for the delivery to them of the 150 shares of the South Shore Lumber & Builders Supplies Limited and of the $10,000 of bonds of the Back River Power Company, or, in the alternative, for the payment to them of the equivalent value of these securities; and further for an order to the mis-en-cause to make the requisite entries in its books to give effect to the judgment to be rendered.

In the second action, instituted by Barclays (Canada) Limited, it was stated that, for the purpose of realizing upon its security, the respondent bank sold and transferred the 150 shares of the South Shore Company to Barclays (Canada) Limited; and the conclusion is that Barclays (Canada) Limited be declared the true and only owner of the shares, and that the estate of James R. Walker be condemned to do all things and sign and execute all documents necessary to complete the transfer of the shares on the books of the mis-en-cause, failing which the mis-en-cause be authorized and ordered to register the necessary transfer upon service of a copy of the judgment to be rendered and to issue to Barclays (Canada) Limited a new certificate in its name for the shares in question.

The agreement of October 31st, 1932, provided for the sale by Walker Press Limited and the purchase by E. S. Alger of all the business and assets of Walker Press Limited, in consideration of the payment and satisfaction of all the obligations of the latter in respect of the lease of the premises occupied by it and in respect of the debts and liabilities of the vendor mentioned in a certain list attached thereto. Alger further undertook to cause a new company to be incorporated and to transfer to that company all the assets conveyed to him, subject to the above mentioned liabilities; and to invest $2,000 in cash in the new company. He was to cause the new company to create and issue bonds of the par value of $19,000 secured on all the assets acquired from Walker Press Limited, as well as upon all future assets of the new company, as a first floating charge by way of hypothec, mortgage, pledge,

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cession and transfer. These bonds of $19,000 were to be delivered to Walker Press Limited within thirty days from the date of the agreement.

Walker Press Limited undertook to surrender its charter within a reasonable time after the receipt of the bonds and to divide the bonds and deliver them to the intervenants pro rata and in proportion to their respective claims.

Alger acknowledged that he was already in possession of all the assets of Walker Press Limited.

Then comes the following clause on which the whole litigation turns:

And the said intervenants hereunto intervening, having taken communication of the foregoing provisions of the present agreement, individually acknowledge that the said agreement is made in fulfilment of an agreement between them and the said E. S. Alger set forth in a letter to him dated the 8th of July, 1932, and the said intervenants agree with the parties of the first and second part that when the said bonds of the new company, hereinabove mentioned, shall have been issued and delivered to the Walker Press Company or its representative or representatives that they individually will accept a pro rata amount of the said bonds proportionate to their respective claims against the Walker Press in full settlement and satisfaction of any and all claims they may have against the Walker Press and the purchaser directly or indirectly, save that inasmuch as the Royal Bank of Canada and Barclays Bank (Canada) and the Kruger Paper Co. Limited hold certain securities as collateral security against the amounts due them by the Walker Press, it is understood that the said banks and the Kruger Paper Co. Ltd., shall foe entitled to continue to hold and/or realize upon such security until and unless their said claims are paid in full through the payment of the said bonds or otherwise, it being understood that the present agreement shall not in any way interfere with the rights of the said banks and Kruger Paper Co. Ltd. in respect of the said collateral security.

Pursuant to the agreement, Alger caused the new company to be incorporated, and the bonds were created and delivered to Walker Press Ltd.; but, before they were issued, S. R. Alger, a brother of the purchaser, submitted to the respondent bank an option to purchase the bonds to which they were entitled as a result of the agreement, for the sum of $2,811.24. The option was accepted and carried out. The bank received the sum of $2,811.24 and surrendered to S. R. Alger its rights to the bond of $14,056.20, which it would otherwise have received.

As a consequence, the executors of James R. Walker claimed that the debt for which the collateral security had been given was extinguished and that they were entitled to recover from the bank the 150 shares of the

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South Shore Lumber & Builders Supplies Ltd. and the $10,000 bonds of the Back River Power Company. At the same time, Barclays (Canada) Limited, as assignee of the bank, brought its action to compel the completion of the transfer of the South Shore Company's share certificate in its name.

The Superior Court (Demers J.) and the majority of the Court of King's Bench held that the debt to the bank had not yet been paid, was not extinguished, and that the bank was, therefore, entitled to hold the collateral securities, and the action of the Walker estate was dismissed. Consequently the action of Barclays (Canada) Limited to have the transfer completed in its favour was maintained.

St-Germain J., in the Court of King's Bench, dissented. He was of opinion that the agreement of October 31st, 1932, created a novation in respect of the debt to the respondent bank and that, by releasing the bond of the Alger Company, the bank had caused the principal debt to be extinguished and the debtor to disappear, thereby becoming obliged to return the collateral security to the Walker estate.

It is now our duty to decide whether both courts below have erred in their interpretation of the agreement to which the intervenants, and amongst them the respondent bank, have given their consent.

The Superior Court referred to articles 1171, 1173 and 1174 of the Civil Code. They read as follows:

1171. Novation is not presumed. The intention to effect it must be evident.

1173. The delegation by which a debtor gives to his creditor a new debtor who obliges himself toward the creditor does not effect novation, unless it is evident that the creditor intends to discharge the debtor who makes the delegation.

1174. The simple indication by the debtor of a person who is to pay in his place, or the simple indication by the creditor of a person who is to receive in his place, or the transfer of a debt with or without the acceptance of the debtor, does not effect novation.

Applying these articles, the Superior Court held

that the agreement of 1932 (did) not create novation; that the Walker Press was discharged only with the reserve that the bank would hold or realize upon the collateral security until the claim of the bank was paid in full * * * it being understood that the agreement would in no way interfere with the rights of the bank in respect of the said collateral security—a stipulation which amounts to say that the bank

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renounces to any personal recourse against the Walker Press Limited, but the debt is not extinguished, since the bank has the right to sell the collateral in payment of the debt.

The Court held that such a stipulation was legal. If it were not, by article 1080 C.C., the whole agreement would be null.

The Court added that

by the said agreement, E. S. Alger did not oblige himself to pay said debt to the bank, but promised to give a further guarantee to the bank by issuing bonds, which obligation he has fulfilled to their satisfaction.

The Court of King's Bench found no error in that judgment and confirmed it purely and simply, St-Germain J. dissenting, as already stated.

By what may be called the intervention clause, the intervenants agreed with Walker Press and with E. S. Alger, that, when the bonds would have been issued and delivered to the Walker Press Company, or its representatives, they individually would accept a pro rata amount of the bonds proportionate to their respective claims against the Walker Press

in full settlement and satisfaction of any and all claims they may have against the Walker Press and the purchaser (E. S. Alger) directly or indirectly, save that inasmuch as * * * Barclays Bank (Canada) * * * hold certain securities as collateral security against the amounts due them by the Walker Press, it is understood that the said bank * * * shall be entitled to continue to hold and/or realize upon such security until and unless their said claims are paid in full through the payment of the said bonds or otherwise; it being understood that the present agreement shall not in any way interfere with the rights of the said bank * * * in respect of the said collateral security.

The rights which the bank possessed "in respect of said collateral security" are evidenced by the hypothecation thereof made on November 29th, 1931, and of which a copy was filed in the record. The collateral securities were stated to be held by the bank as a pledge to secure all advances presently made or which at any time thereafter may be made to Walker Press Limited. It was agreed that, in default being made in repaying any advance or any part thereof, when due, or on failure to comply with any demand for payment, or if any security should, in the opinion of the bank, depreciate in value, the bank could, without notice, without advertisement and without any other formality, all of which are declared waived, sell the collaterals, or any of them on any recognized exchange,

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or by public or private sale. The bank was not to be responsible for any loss occasioned by any sale of any collateral, or by the retention of or refusal to sell the same. The bank or its manager was made the attorney irrevocable of the Walker Press Limited and could transfer all or any of the collaterals, or fill in all blanks in any transfer of stock, bonds or debentures, or any power of attorney or document delivered to it, and the bank could delegate its powers and its delegate could sub-delegate the same.

At the request of the bank, Walker Press Limited was to execute all transfers and documents which may be reasonably required, with all powers of sale and other necessary powers as may be expedient for vesting in the bank, or such person or persons as it may appoint, all or every such collaterals.

If any payment on account of the advance be made the bank shall not by reason thereof be required to surrender any of the collateral pledged.

Obviously, the main object of the intervention of the bank in the agreement of 1932 was to give the bank's consent to the sale by the Walker Press Limited of all its assets (bulk sale), under articles 1569 (a) & seq. of the Civil Code, to E. S. Alger—a sale which otherwise could not have been made to the prejudice of the Walker Press' creditors.

The intention was not to effect novation. As stated in art. 1171 C.C., novation is never presumed and the intention to effect it must be evident.

Here, by force of art. 1173 C.C., even if the agreement should be interpreted as one by which Walker Press Limited gave to the bank a new debtor who obliged himself towards the bank, such delegation did not effect novation "unless it is evident that the creditor intends to discharge the debtor who makes the delegation." Otherwise, the simple indication by the Walker Press of a person who was to pay in its place did not effect novation (Art. 1174 C.C.).

The words in the intervention clause:

in full settlement and satisfaction of any and all claims they may have against the Walker Press and the purchaser directly or indirectly,

if the stipulation stopped there, would of course be decisive of the present case; but these words are qualified by what

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follows; and what follows is a saving condition, which would have no meaning unless it is understood to mean what the learned trial judge has held to be the true construction of the agreement. The qualification is that, inasmuch as the bank holds certain collateral securities against the amounts due by the Walker Press, it is understood that the bank shall be entitled to continue to hold and to realize upon such securities until and unless their "said claims are paid in full through the payment of the said bonds or otherwise."

The words "said claims" are evidently the claims against Walker Press Limited. The words "or otherwise" mean that the parties contemplated that these "claims" might be paid either through the payment of the bonds or in some other way. The bond issued by the new company, delivered to Walker Press Limited and, in turn, remitted to the respondent bank, was not, therefore, to be the only means through which the bank could expect payment of its debt against the Walker Press.

Moreover, the clause goes on to say:

it being understood that the present agreement shall not in any way interfere with the rights of the said bank * * * in respect of the said collateral security.

And, as we have seen, the rights of the bank in respect of the collateral security were that the bank could sell them on a recognized exchange, or by public or private sale, in order to satisfy its claim against Walker Press Limited. The bank could realize upon these collaterals or allow them to be sold and was not to be responsible for any loss occasioned by any sale. Further, any substituted collaterals would be held by the bank subject to the same terms and conditions and with the same powers and authorities.

It was not E. S. Alger himself, but it was the new company that he was to form, which undertook to issue the bonds; and the bonds were not to be issued in favour of the intervenants, including the respondent bank, but they were to be issued and given to Walker Press Limited purely and simply in payment of the assets and the business purchased by Alger.

The true meaning of the intervention by the larger creditors was that they consented to the wholesale transfer of the assets and the business of Walker Press to Alger

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(which could not have legally been made without such consent); but, although they were, of course, willing to receive the bonds of the new company, and they would, in consideration for receiving same, relieve Walker Press of its personal obligations towards them, they made it quite distinctly understood that their rights in the collateral securities were to be in no way interfered with. And that means that such rights would remain absolutely intact, to guarantee the claim already in existence against Walker Press as well as the additional claim which they would acquire against Alger Printing Company, when they would become the holders of the bonds. This is clearly expressed in the clause by the words "shall be entitled to continue to hold and/or realize upon such security until and unless their said claims are paid in full through the payment of the said bonds or otherwise." Henceforth the bank and the larger creditors were to have a claim both as a result of holding the bonds "or otherwise"; and the agreement was not "in any way" to interfere with the rights of these larger creditors "in respect of the said collateral securities." They would have been interfered with in some way if the collateral securities were not to guarantee the full original claim against Walker Press and were afterwards to guarantee only the payment of the bonds. In other words, the intervenants intended to preserve their full rights to be paid out of the proceeds of the collateral securities, until and unless they had been otherwise paid of their debt.

So that the alleged full and complete discharge to the Walker Press was, in reality, only a qualified discharge. Undoubtedly the intervenants were giving up any right to claim against Walker Press personally and any right to be paid out of the general assets of Walker Press, except in so far as the bonds which they were getting from Alger Printing Company were to be secured upon those assets through the trust deed executed in connection with the issue of the bonds.

But their rights upon the collateral securities remained untrammelled and, to the extent that the existence of the debt of Walker Press was necessary for the purpose of preserving to the collateral security the character of a legal pledge, that debt was to remain in existence. It could no longer be claimed as a personal debt against the Walker

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Press, it could not have been realized against the latter's general assets, but it subsisted as a debt which could be realized against the collateral securities. It became a claim propter rem.

True it is that the stipulation in the agreement whereby the Walker Press undertook to surrender its charter supplies a difficulty in the interpretation adopted by the trial judge and by the Court of King's Bench; but the construction of the agreement may not depend upon this stipulation taken alone and isolated from the remainder of the document. The agreement must be interpreted as a whole. There is to be found in it the clear intention of preserving all the rights of the creditors against the collateral security, and, of necessity, the intention that the Walker Press' indebtedness should subsist in so far as necessary to keep the pledge alive.

It follows that we are in agreement with the conclusions of the judgments appealed from.

The consequence is that when Walker Press delivered the bonds to the respondent bank, either physically or constructively, in compliance with the agreement, it was getting relieved of the personal obligation it had incurred towards the respondent bank in so far as that obligation may have authorized the bank to realize against the general assets of. Walker Press; but it was not otherwise relieved of its obligation in so far as it could be realized against the collateral security. There was no intention to effect novation in that respect; and, at all events, such intention was far from being evident, or such as to meet the requirements of the Civil Code. The respondent bank sold the bond of the Alger Printing Company for an amount less than the total indebtedness of Walker Press Limited. In view of what we have already said, this bond could well be considered, as it has been by the two courts below, as a further guarantee or security to the bank. Under the terms of the hypothecation of the collateral securities, this additional security was held by the bank "subject to the same terms and conditions and with the same powers and authorities" as had been conferred in respect of the original collaterals. The bank could sell these collaterals, or any of them, by private sale. And it was not to be responsible towards Walker Press "for any loss occasioned by any sale of any collateral."

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Both the trial court and the appellate court came to the conclusion that

Il semble bien, d'après la preuve, qu'il n'aurait guère été possible de trouver acheteur à un prix plus élevé pour ces bons.

These findings are fully warranted by the evidence. At all events, the burden of proving the contrary fell upon the appellants, and they have failed to discharge that burden.

We have given every consideration to the very able argument of counsel for the appellants and we find ourselves unable to come to a conclusion different from that reached by the judgments appealed from, which should, therefore, be confirmed with costs.

Appeals dismissed with costs.

Solicitors for the appellants: Chauvin, Walker, Stewart & Martineau.

Solicitors for the respondents: Magee, Nicholson & O'Donnell.